Mortgage crisis echoes through region spared most of its effects

Charles Adams looks into a foreclosed home next to his residence on Arcadia Drive in Tuscaloosa on Wednesday. Adams said that the home has been vacant since December 2005, and several attempts to get the mortgage lender to care for the property have failed.

Staff photo | Dan Lopez

By Matt HawkStaff Writer

Published: Saturday, November 17, 2007 at 4:23 p.m.

Last Modified: Saturday, November 17, 2007 at 4:23 p.m.

TUSCALOOSA | In the quiet, upper middle class neighborhood of Arcadia, tucked away between tall trees decked in the fiery colors of autumn and the well-kept yards of suburbia, a piece of the American dream lies dying.

For nearly two years, the house at 3345 Arcadia Drive — a three-bedroom, 1950s-style bungalow with a backyard pool and remodeled kitchen — has been vacant, its last owner ousted, neighbors said, by a subprime mortgage he could no longer afford.

“He had just reached out too far,” said Charles Adams, who lives next door to the foreclosed property. “He had two trucks that he had [borrowed] money on, and it all hit him at once.”

Subprime adjustable-rate mortgages have starting interest rates well below the U.S. Treasury standard. Rates adjust upward, often dramatically, after a period of time. In the current economic climate, many borrowers cannot afford the new rates, which can boost monthly payments by as much as 35 percent.

A large wave of adjustments coupled with a downturn in home values have forced many subprime borrowers into foreclosure in recent months, roiling the already shaky national housing market.

While Tuscaloosa County has also seen an increase in subprime foreclosures, the damage has been minimal. Just don’t tell that to Arcadia residents, who have to live with the consequences of one such loan gone bad.

Adams said lender Countrywide Financial Corp. has done nothing to maintain the property since the 2005 foreclosure. Shrubs have been allowed to grow wild. Pokeweed has taken over the lawn. Adams said he recently found a broken window pane.

As are the neighborhood’s property values and sense of security. Adams said every attempt to get Countrywide to take action has failed. City officials have said they can do little more than ensure the lawn is cut periodically.

“It’s a neighborhood eyesore,” Adams said.

How it started

Originally intended to make home ownership possible for people with less than perfect credit, subprime loans became extremely popular among both borrowers and lenders during the housing boom of the first half of this decade.

Borrowers favored the loans because they could buy more expensive homes than they could otherwise afford. Lenders liked the fees and higher interest rates they could charge when these loans adjusted upward.

But falling home values combined with the resetting of interest rates on millions of subprime loans have led to a record surge of foreclosures that has shaken housing markets throughout the country.

Fortunately for Tuscaloosa County, a few foreclosed houses like 3345 Arcadia Drive may be all the harm suffered from the national subprime mortgage collapse.

“It looks like we’ll come out with little damage compared to places like Cleveland where subprime lending has been so rampant that whole parts of the city are going under,” said Leonard Zumpano, professor of finance at the University of Alabama and founder and former director of the UA-based Alabama Center for Real Estate.

Still, as the Arcadia house demonstrates, the Tuscaloosa market has not come through the crisis unscathed. This should not come as a surprise, Zumpano said.

“Every market has some subprime borrowing,” he said. “Every market has borrowers who have been tempted to take out these alternative-type loans.”

To measure the local effect of the subprime fallout, The Tuscaloosa News, with the help of ACRE researchers, counted foreclosures in the county over the past seven years. Totals for each year were compared to the number of foreclosures in the county initiated by 10 of the biggest investment banks and mortgage lenders embroiled in the subprime collapse.

With the exception of a dip in 2004 and 2005, The News found the number of foreclosures in Tuscaloosa County has grown steadily during the past seven years, as have the percentage of those foreclosures associated with the aforementioned big players in the subprime market.

Of the 107 foreclosures in 2002, 19, or 17.7 percent, came from such lenders. In contrast, these big names accounted for 140, or 81.9 percent of the 171 foreclosures in 2007. This corresponds roughly to the growth and decline of the subprime industry.

What it means

Although such figures may seem alarming — and they do indicate an increase in local subprime foreclosures — few parallels can be drawn between Alabama markets and the rest of the country.

The majority of subprime lending occurred in hot investment markets like California, Nevada, Ohio and Florida. In some cases, subprime loans accounted for more than half of total loans in those markets.

In contrast, subprimes account for a much smaller portion of Alabama loan originations. According to data from the Office of Federal Housing Enterprise Oversight in Washington, D.C., traditional loans accounted for 76 percent of the state’s mortgages in 2006.

Office of Federal Housing Enterprise Oversight data indicate that subprime loans account for roughly 10 percent of mortgages in Tuscaloosa County, compared to 14 percent in other Alabama metropolitan areas.

“Most people in Alabama and Tuscaloosa in general are more conservative and have fixed-rate mortgages, so you’re not seeing a lot of adjustments,” said Brent Sute, branch manager of New South Federal Mortgage on Greensboro Avenue.

And though Alabama’s housing market has softened in recent months, a strong economy, low unemployment and a market built on steady growth, not explosive speculation, have kept home values relatively stable.

As of September, Alabama ranked 43rd in the nation for foreclosures, according to the California-based organization RealtyTrac. Mississippi ranked 46th. Georgia ranked sixth.

According to the Web site Foreclosure.com, most of the state’s foreclosures occur in the lower end of the housing market, meaning very little of the speculative buying frenzy that artificially inflated markets elsewhere in the nation has made its way here.

“We didn’t have a huge boom like the California markets, so we’re not having a big bust like they’re having,” Sute said. “It’s much more mild.”

What’s next

Which is not to say that Alabama and the Tuscaloosa area will experience no ill effects before the national market corrects itself.

The subprime collapse has cost the U.S. economy billions, delayed the recovery of the national housing market and turned the mortgage industry on its ear. Some local fallout is inevitable.

Jim Flemming, CEO of the Bank of Tuscaloosa, said the most immediate effect locally has been a drop in mortgage options as lenders everywhere tighten underwriting standards.

“There has been a great reduction in product offering, but a lot of those were products that were never used in this market,” Flemming said.

Traditional fixed-rate loans, however, remain readily available to borrowers with steady income and good credit, Zumpano said. “If you’ve got the income and you’ve got a standard loan, you’re not going to be particularly upset if someone else in New York City is in default next month,” he said.

Sute said it’s the people with less than perfect credit, the people subprime loans were created for, who will have the greatest difficulties.

“People who have credit issues in the past [but] who could get a loan, are not able to at this point,” he said.

The long-range impact of the subprime collapse on housing is harder to gauge.

Zumpano predicted it would take Alabama six to 10 months to work through an excess of homes on the market, barring further shocks to the economy. Mark Vitner, senior economist for Wachovia Corp., estimated the national housing market would recover by 2009.

Unfortunately, there’s plenty that could derail those estimates. The damaged housing and investing markets leave the country’s economy more vulnerable to fluctuations in the price of oil and international tensions.

The subprime crisis may also have a few surprises still in store.

“I don’t think all of the information is out yet,” Zumpano said. “If it comes out that these investment firms are in really serious trouble, then the [national] situation could explode.”

Although such an outcome almost certainly would have a depressing effect on local markets, he said, Alabama would not suffer nearly as much as those states already reeling from the subprime collapse.

Alabama’s tradition of conservative lending will continue to provide a cushion.

“If you’re in the home for the long run, not as an investment, then you’re OK,” Zumpano said. “I think the majority of Alabamians are in that category.”

<p>TUSCALOOSA | In the quiet, upper middle class neighborhood of Arcadia, tucked away between tall trees decked in the fiery colors of autumn and the well-kept yards of suburbia, a piece of the American dream lies dying. </p><p>For nearly two years, the house at 3345 Arcadia Drive  a three-bedroom, 1950s-style bungalow with a backyard pool and remodeled kitchen  has been vacant, its last owner ousted, neighbors said, by a subprime mortgage he could no longer afford.</p><p>He had just reached out too far, said Charles Adams, who lives next door to the foreclosed property. He had two trucks that he had [borrowed] money on, and it all hit him at once.</p><p>Subprime adjustable-rate mortgages have starting interest rates well below the U.S. Treasury standard. Rates adjust upward, often dramatically, after a period of time. In the current economic climate, many borrowers cannot afford the new rates, which can boost monthly payments by as much as 35 percent.</p><p>A large wave of adjustments coupled with a downturn in home values have forced many subprime borrowers into foreclosure in recent months, roiling the already shaky national housing market. </p><p>While Tuscaloosa County has also seen an increase in subprime foreclosures, the damage has been minimal. Just don’t tell that to Arcadia residents, who have to live with the consequences of one such loan gone bad. </p><p>Adams said lender Countrywide Financial Corp. has done nothing to maintain the property since the 2005 foreclosure. Shrubs have been allowed to grow wild. Pokeweed has taken over the lawn. Adams said he recently found a broken window pane.</p><p>The elements are seeping in, he said. It’s a nice place, but boy it’s going downhill fast. </p><p>As are the neighborhood’s property values and sense of security. Adams said every attempt to get Countrywide to take action has failed. City officials have said they can do little more than ensure the lawn is cut periodically. </p><p>It’s a neighborhood eyesore, Adams said.</p><h3>How it started</h3>
<p>Originally intended to make home ownership possible for people with less than perfect credit, subprime loans became extremely popular among both borrowers and lenders during the housing boom of the first half of this decade.</p><p>Borrowers favored the loans because they could buy more expensive homes than they could otherwise afford. Lenders liked the fees and higher interest rates they could charge when these loans adjusted upward.</p><p>But falling home values combined with the resetting of interest rates on millions of subprime loans have led to a record surge of foreclosures that has shaken housing markets throughout the country.</p><p>Fortunately for Tuscaloosa County, a few foreclosed houses like 3345 Arcadia Drive may be all the harm suffered from the national subprime mortgage collapse.</p><p>It looks like we’ll come out with little damage compared to places like Cleveland where subprime lending has been so rampant that whole parts of the city are going under, said Leonard Zumpano, professor of finance at the University of Alabama and founder and former director of the UA-based Alabama Center for Real Estate.</p><p>Still, as the Arcadia house demonstrates, the Tuscaloosa market has not come through the crisis unscathed. This should not come as a surprise, Zumpano said.</p><p>Every market has some subprime borrowing, he said. Every market has borrowers who have been tempted to take out these alternative-type loans. </p><p>To measure the local effect of the subprime fallout, The Tuscaloosa News, with the help of ACRE researchers, counted foreclosures in the county over the past seven years. Totals for each year were compared to the number of foreclosures in the county initiated by 10 of the biggest investment banks and mortgage lenders embroiled in the subprime collapse.</p><p>Lenders surveyed included Countrywide Financial, Deutsche Bank, Wells-Fargo and Citigroup.</p><p>With the exception of a dip in 2004 and 2005, The News found the number of foreclosures in Tuscaloosa County has grown steadily during the past seven years, as have the percentage of those foreclosures associated with the aforementioned big players in the subprime market.</p><p>Of the 107 foreclosures in 2002, 19, or 17.7 percent, came from such lenders. In contrast, these big names accounted for 140, or 81.9 percent of the 171 foreclosures in 2007. This corresponds roughly to the growth and decline of the subprime industry.</p><h3>What it means</h3>
<p>Although such figures may seem alarming  and they do indicate an increase in local subprime foreclosures  few parallels can be drawn between Alabama markets and the rest of the country.</p><p>The majority of subprime lending occurred in hot investment markets like California, Nevada, Ohio and Florida. In some cases, subprime loans accounted for more than half of total loans in those markets. </p><p>In contrast, subprimes account for a much smaller portion of Alabama loan originations. According to data from the Office of Federal Housing Enterprise Oversight in Washington, D.C., traditional loans accounted for 76 percent of the state’s mortgages in 2006.</p><p>Office of Federal Housing Enterprise Oversight data indicate that subprime loans account for roughly 10 percent of mortgages in Tuscaloosa County, compared to 14 percent in other Alabama metropolitan areas. </p><p>Most people in Alabama and Tuscaloosa in general are more conservative and have fixed-rate mortgages, so you’re not seeing a lot of adjustments, said Brent Sute, branch manager of New South Federal Mortgage on Greensboro Avenue. </p><p>And though Alabama’s housing market has softened in recent months, a strong economy, low unemployment and a market built on steady growth, not explosive speculation, have kept home values relatively stable.</p><p>As of September, Alabama ranked 43rd in the nation for foreclosures, according to the California-based organization RealtyTrac. Mississippi ranked 46th. Georgia ranked sixth.</p><p>According to the Web site Foreclosure.com, most of the state’s foreclosures occur in the lower end of the housing market, meaning very little of the speculative buying frenzy that artificially inflated markets elsewhere in the nation has made its way here. </p><p>We didn’t have a huge boom like the California markets, so we’re not having a big bust like they’re having, Sute said. It’s much more mild.</p><h3>What’s next</h3>
<p>Which is not to say that Alabama and the Tuscaloosa area will experience no ill effects before the national market corrects itself.</p><p>The subprime collapse has cost the U.S. economy billions, delayed the recovery of the national housing market and turned the mortgage industry on its ear. Some local fallout is inevitable.</p><p>Jim Flemming, CEO of the Bank of Tuscaloosa, said the most immediate effect locally has been a drop in mortgage options as lenders everywhere tighten underwriting standards. </p><p>There has been a great reduction in product offering, but a lot of those were products that were never used in this market, Flemming said. </p><p>Traditional fixed-rate loans, however, remain readily available to borrowers with steady income and good credit, Zumpano said. If you’ve got the income and you’ve got a standard loan, you’re not going to be particularly upset if someone else in New York City is in default next month, he said.</p><p>Sute said it’s the people with less than perfect credit, the people subprime loans were created for, who will have the greatest difficulties.</p><p>People who have credit issues in the past [but] who could get a loan, are not able to at this point, he said. </p><p>The long-range impact of the subprime collapse on housing is harder to gauge. </p><p>Zumpano predicted it would take Alabama six to 10 months to work through an excess of homes on the market, barring further shocks to the economy. Mark Vitner, senior economist for Wachovia Corp., estimated the national housing market would recover by 2009.</p><p>Unfortunately, there’s plenty that could derail those estimates. The damaged housing and investing markets leave the country’s economy more vulnerable to fluctuations in the price of oil and international tensions. </p><p>The subprime crisis may also have a few surprises still in store.</p><p>I don’t think all of the information is out yet, Zumpano said. If it comes out that these investment firms are in really serious trouble, then the [national] situation could explode.</p><p>Although such an outcome almost certainly would have a depressing effect on local markets, he said, Alabama would not suffer nearly as much as those states already reeling from the subprime collapse.</p><p>Alabama’s tradition of conservative lending will continue to provide a cushion. </p><p>If you’re in the home for the long run, not as an investment, then you’re OK, Zumpano said. I think the majority of Alabamians are in that category.</p><p>Reach Matt Hawk at matt.hawk@tuscaloosanews.com or 205-722-0213.</p>